Technogym (BIT:TGYM) appears to be using debt sparingly
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Technogym SpA (BIT:TGYM) uses debt. But should shareholders worry about its use of debt?
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Technogym
What is Technogym’s debt?
You can click on the chart below for historical numbers, but it shows Technogym had €107.5 million in debt in December 2021, up from €120.4 million a year earlier. However, he has €228.1m in cash which offsets this, leading to a net cash of €120.7m.
A look at Technogym’s responsibilities
Zooming in on the latest balance sheet data, we can see that Technogym had liabilities of €346.6 million due within 12 months and liabilities of €105.0 million due beyond. In return for these obligations, it had cash of €228.1 million as well as receivables worth €124.1 million at less than 12 months. It therefore has liabilities totaling 99.3 million euros more than its cash and short-term receivables, combined.
Given that publicly traded Technogym shares are worth a total of €1.33 billion, it seems unlikely that this level of liability is a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. While it has liabilities worth noting, Technogym also has more cash than debt, so we’re pretty confident it can manage its debt safely.
On another positive note, Technogym increased its EBIT by 12% compared to last year, further increasing its ability to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Technogym can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Although Technogym has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it’s building (or erodes) this cash balance. . Fortunately for all shareholders, Technogym has actually produced more free cash flow than EBIT over the past three years. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While it is always a good idea to look at a company’s total liabilities, it is very reassuring that Technogym has 120.7 million euros in net cash. And he impressed us with a free cash flow of 66 million euros, or 102% of his EBIT. So is Technogym’s debt a risk? This does not seem to us to be the case. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example – Technogym has 1 warning sign we think you should know.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.